Let’s have a conversation with your future self. Once you and your fellow trustees are off the board and the current chief executive has retired, and you gaze through the gauzy filter of the past, will you like what you see? With the genius of hindsight, what would you change about your organization and your board’s role in it?
In other words, what would you like your board’s legacy to be?
The legacy question is an important one as boards confront seemingly insurmountable challenges as they try to fulfill their missions for their communities. As health care’s challenges grow and intensify, many boards and CEOs around the country are finding themselves unprepared.
Naturally, CEOs and trustees seek clarity in understanding the issues, and certainty in addressing them. However, when clarity and certainty are nowhere to be found, boards and executives may settle for the illusion of clarity and certainty by following experts and the crowd. This all-too-common dynamic is occurring now, and it is centered on consolidation.
Mergers: The Rhetoric
No one in the C-suite or boardroom has escaped the constant drumbeat of expert opinion on the need for scale. The drivers for consolidation are well-known: declining payments and volume; tight credit and a need to access capital for population health, clinical integration and facility development; and a stronger competitive position. Many experts also believe that mergers are necessary to spread costs for technology and administration over a larger revenue base and strengthen market penetration by adding service lines and physicians.
In some cases, however, there are less rational and unvoiced drivers of consolidation: the need to respond to uncertainty; the influence of peers; and advice from external advisers who generate fees through consolidation. However, the most powerful underlying and often unvoiced motive is the hope of commanding higher prices through increased market power. The new industry meme is: In 20 years, only 50 health systems (or some other number) will control 90 percent (or some other number) of all health care delivered in the United States. If your hospital wants to be around in 20 years, it needs to be, or be a part of, one of those 50.
Mergers: The Reality
But rhetoric doesn’t always match reality. History and studies show that the motivating factors behind these partnerships, such as economies of scale or benefits for clinicians, don’t always pan out. The evidence for scale economies in hospital care is extremely thin. And the challenges of integrating and operating merged entities always are more difficult than leaders anticipate.
In the 1990s, a surge in mergers produced a few remarkable new organizations: Sutter Health, Banner Health, Ascension, Trinity Health (now CHE Trinity Health following its merger with Catholic Health East) and BJC Health. But it also produced some disasters: Stanford–UCSF, Penn State–Geisinger, the near merger of Mount Sinai and New York University, and the Allegheny Health, Education and Research Foundation. AHERF’s misguided acquisition strategy led to the largest nonprofit health care bankruptcy in U.S. history.
In addition to the lessons taught by these failed mergers, boards need to understand that the payer environment has materially changed. Thanks to health reform, Blue Cross plans and commercial health insurers are operating in a new world of federal cost surveillance. Consumers are shouldering more costs and, as their demands for quality and price data are met, only the organizations that deliver high-value care will thrive. The current disinflationary price environment has markedly reduced earnings even for the largest and most successful health systems, despite the consolidation that has taken place.
Then there is the risk that the merger strategy may run afoul of the more confident and aggressive Justice Department and Federal Trade Commission, which are now taking a harder stance against consolidations for pricing power purposes, and have several recent successes under their belts.
Merging is not always an inappropriate solution. Indeed, there are some hospitals or systems that will not be viable in the transformed health care world. For these organizations, merger, sale or closure is the correct answer. For many others, however, a merger or sale will only obscure their organizations’ underlying challenges until all the dust settles.
The Governance Challenge
For some boards, the merger decision is a substitute for succession planning or, indeed, for a strategy. It often indicates exhaustion on the part of board and C-suite members and a failure to build a pipeline of qualified leaders for the future. It is a paradoxical failure: Just at the moment when effective governance is most needed, it is absent. The issues requiring engaged, courageous governance are challenging, controversial and difficult, and the merger decision has become a relatively easy way out for many boards.
How can mergers be a substitute for effective succession planning? Some boards can be reluctant to challenge CEOs who are a few years from retirement. In a dysfunctional collusion, a long-serving, well-liked CEO who lacks the energy or competencies to lead the organization in a radically different environment may be protected by the board precisely when it should be pushing him or her. One board chair made this point when he confided, “I know that we should replace the CEO, but I just can’t go through a CEO recruitment process again. When the CEO leaves, I leave.”
This example reveals that the succession planning problem is not limited to executives. It includes boards that fail to remove members who lack engagement or who do not spend the time to master the growing complexities of the post-Affordable Care Act environment. Just as a chief executive who is not up to the current challenges should be retired in a respectful and appropriate manner by the board, so should an overmatched or unfocused trustee be replaced by someone with the energy, competencies, skill and knowledge sets required to govern.
These are not easy issues. Some trustees may quietly recognize that they or their fellow board members or their CEO are overwhelmed. And while they know what should be done, they may find it easier to commit to doing a big deal to cap their careers than to acknowledge that it is time for them to move on. In these situations, a merger becomes a replacement for succession planning. The reason is obvious: People don’t want to envision what the institution will look like without them.
For other boards, a merger becomes a substitute not only for succession planning, but indeed for strategy itself. Getting bigger is not a strategy; in some cases, it’s merely shifting senior leaders’ responsibilities to a fresher team of people across town or in another town. Nothing about a merger simplifies the task of managing a complex health care enterprise. And mergers often have the effect of lengthening the feedback loops among the physician community, patients and executives, often to the point that those loops cease to function altogether.
Some boards and CEOs know that they need to respond to delivery system transformation, but they don’t know what to do. Or, they know what to do, but don’t have the courage or political will to implement an effective strategy. For these leaders, doing something — anything! — is better than doing nothing.
And because the merger process creates so much uncertainty for as long as five years after the deal is inked, strategic concerns are put on the back burner amid the herculean effort to blend cultures and management teams, and make the merger a success. Until it is completed, organizations are often frozen in place and their respective medical staff and management are easy pickings for recruiters and the competition. Are any of these common pitfalls really effective governance?
So, what does your board want its legacy to be?
By being vigilant, your board may recognize and respond to leadership fatigue and burnout in the early stages. By being a courageous leader, you can help your board to focus on the mission and best interests of the organization, have the hard conversations, and make the necessary difficult decisions.
By being clear that a key part of your governance role is to be a critical questioner and a sparring partner to your CEO as well as the leadership of your board, you can more easily identify and avoid the influence of fads or peers.
Boards that demand accountable governance and leadership — whose organizations can be dominant or be the high-value providers in their market; that can truly integrate with or collaborate with their physicians; that can pull 20–40 percent of their cost structure out; that can operate in a lean and responsive way, providing high-quality, safe and cost-efficient care; and that can excel in key clinical specialties areas — may well be able to stay independent for a long while.
At least, that is one vision for a possible legacy. What is yours?
Jeff Goldsmith (firstname.lastname@example.org) is president of Health Futures Inc., Charlottesville, Va., and associate professor of public health sciences at the University of Virginia. Jamie Orlikoff (email@example.com) is president of Orlikoff & Associates Inc., Chicago; the national adviser on governance and leadership to the American Hospital Association and Health Forum; and senior consultant to the AHA’s Center for Healthcare Governance. Both authors are members of Speakers Express.